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In general, an employer may not deduct more than an amount determined under one of three alternative computational methods: the minimum funding standard method, the individual level premium method, and the normal cost plus 10-year amortization method.
- Minimum Funding Standard Method: An amount necessary to satisfy the minimum funding standard is the excess of any charges over credits to the plan's funding standard account. Specifically, each year, the account is charged with amounts which must be paid to satisfy certain minimum funding standards and is credited with plan contributions made, any decrease in plan liabilities, and experience gains. If the plan meets the minimum funding standards (the charges equal the credits), this funding standard account will show a zero balance. If more than a minimum required amount has been contributed, i.e., the credits exceed the charges, the account will show a positive balance. If the opposite is true, the account will show an accumulated funding deficiency on which an excise tax is imposed.
- Individual Level Premium Method: An amount necessary to fund the remaining unfunded costs to the plans assets and current service credits expressed as a level amount or as a level of percentage of compensation over the projected remaining future service of the plan's participants.
- The Normal Cost plus 10-Year Amortization Method: An amount equal to the plan's normal cost or its liabilities for benefits earned or accruing in the current plan year, plus any supplemental liability such as past service liability, experience losses and other charges. The supplemental liability must be amortized in equal annual installments over ten years.
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